PROPOSAL FOR REVIEW
PROJECT TITLE: INDIA: SOLAR THERMAL POWER
GEF FOCAL AREA: Climate Change
GEF Eligibility: Under Financial Mechanism of
Convention (Ratification 1/11/93)
Total Project Costs: US$245 million
GEF Financing: US$49 million
Government Counterpart Financing: US$20 million
Co-financing: KfW, amount to be determined;
independent power producer
GEF Operational Focal Point: Department of Economic Affairs,
Ministry of Finance
GEF Implementing Agency: World Bank
Executing Agency: Private Independent Power Producer
(IPP)
Rajasthan Energy Development Agency
(REDA)
Local Counterpart Agencies: Ministry of Non-Conventional Energy
Sources Contact: Mr. Prabhakara,
Secretary
State Government of Rajasthan
Contacts: Mr. S.P. Gupta, Secretary
Department of Mines and Energy
P. Dayal, Chief Executive and
Director
Rajasthan Energy Development Agency
Estimated Starting Date March 1997
(Effectiveness):
Project Duration: Five years
GEF Preparation Costs: $750,000 to $1 million
COUNTRY AND SECTOR BACKGROUND
- India's power sector has a total installed capacity of approximately
77,000 MW of which 65% is coal-based, 28% hydro, and the balance
gas and nuclear-based. Power shortages are estimated at about
10% of total energy and 20% of peak capacity requirements and
are likely to increase in the coming years. For the period FY93
to FY97 nearly 50,000 MW of capacity additions are required, but
due to financial constraints less than 20,000 MW would be realized.
The bulk of capacity additions involve coal thermal stations
supplemented by hydroelectric plant development. Coal-based power
involve environmental concerns relating to emissions of suspended
particulate matter (SPM), sulfur dioxide (SO2), nitrous oxide,
carbon dioxide, methane and other gases. On the other hand, large
hydroplants can lead to soil degradation and erosion, loss of
forests, wildlife habitat and species diversity and most importantly,
the displacement of people. To promote environmentally sound
energy investments as well as help mitigate the acute shortfall
in power supply, the Government of India (GOI) is promoting the
accelerated development of the country's renewable energy resources
and has made it a priority thrust area under India's National
Environmental Action Plan (NEAP).
- GOI estimates that a potential of 50,000 MW of power capacity
can be harnessed from new and renewable energy sources but due
to relatively high development cost experienced in the past these
were not tapped as aggressively as conventional sources. Nevertheless,
development of alternate energy has been part of GOI's strategy
for expanding energy supply and meeting decentralized energy needs
of the rural sector. The program, considered one of the largest
among developing countries, is administered through the Ministry
of Non-Conventional Energy Sources (MNES), energy development
agencies in the various States, and the Indian Renewable Energy
Development Agency Limited (IREDA). During recent years, private
sector interest in the renewable energy sector increased due to
several factors: (i) the Government opened the power sector to
private sector participation in 1991; (ii) tax incentives are
offered to developers of renewable energy systems; (iii) there
has been a heightened awareness of the environmental benefits
of renewable energy relative to conventional forms and of the
short-gestation period for developing alternate energy schemes.
Recognizing the opportunities afforded by private sector participation,
MNES revised its Eighth Plan priorities in July 1993 by giving
greater emphasis on promoting renewable energy technologies for
power generation. Accordingly, Plan targets for power generation
from renewables were raised to 2000 MW, i.e., 500 MW through wind,
600 MW small hydro, 300MW from bagasse, 40MW solar thermal and
the balance from other bio-energy and solar energy sources. To
date, over 550MW of windfarm capacity has been commissioned under
the Eighth Plan bringing the total wind generation capacity in
India to 556MW. About 115 MW capacity of small hydro has so far
been installed with another 216MW under construction. But the
sector's contribution to energy supply while growing is expected
to remain a small fraction of the total requirements of India
until such time that operational experience and cost recovery
of investments are more widely achieved to render the technologies
fully commercial.
- Solar Energy. India is located in the equatorial
sun belt of the earth, thereby receiving abundant radiant energy
from the sun. The India Meteorological Department maintains a
nationwide network of radiation stations which measure solar radiation
and also the daily duration of sunshine. In most parts of India,
clear sunny weather is experienced 250 to 300 days a year. The
annual global radiation varies from 1600 to 2200 kWh/sq.m. which
is comparable with radiation received in the tropical and sub-tropical
regions. The equivalent energy potential is about 6,000 million
GWh of energy per year. The highest annual global radiation
is received in Rajasthan and northern Gujarat. In Rajasthan,
large areas of land are barren and sparsely populated, making
these areas suitable as locations for large central power stations
based on solar energy.
- The Government supports development of both solar thermal
and solar photovoltaics (PV) power generation. To demonstrate
and commercialize solar thermal technology in India, MNES is promoting
megawatt scale projects such as the proposed 35MW solar thermal
plant in Rajasthan and is encouraging private sector projects
by providing financial assistance from the Ministry. Parallel
efforts are underway in the area of solar PV in which pilot-scale
grid-connected solar PV power systems (25kW to 100kW) are under
trial operations in addition to stand-alone projects in remote
unelectrified areas. In Rajasthan, the State Government is establishing
a solar enterprise zone by offering a package of incentives to
private investors willing to develop various solar power technologies
such as solar thermal and solar PV. An international tender recently
issued by Rajasthan yielded offers for a 50MW solar PV power
station as well as a solar chimney facility to be operated on
an independent power production (IPP) basis.
PROJECT OBJECTIVES
- The main objectives of the project are: (a) To demonstrate
the operational viability of parabolic trough solar thermal power
generation in India; (b) promote commercial development of solar
thermal technology and cost reduction; and (c) help reduce greenhouse
gas (GHG) global emissions in the short and longer term. Specifically,
operational viability will be demonstrated through operation of
a solar thermal plant by an independent power producer (IPP)
with commercial power sales and delivery arrangements with the
grid. Technology development would be supported through technical
assistance and training. The project would be pursued under GEF's
program objective on climate change and is envisaged as the first
step of a long term program for promoting solar thermal power
in India and around the world that would lead to a phased deployment
of similar systems in the country and in other developing nations.
The project would represent the second GEF operation in the energy
sector in India.
PROJECT DESCRIPTION
- The project involves: (a) Construction by the private sector
of a solar thermal/fossil-fuel hybrid power plant of about 140MW
incorporating a parabolic trough solar thermal field of 35MW
to 40 MW; and (b) Technical assistance package to
support commercialization of solar thermal technology.
- Investment Component. (See Annex 1) The
solar thermal/hybrid power station will comprise: (i) a solar
field with a collection area of 219,000 m2 to support a 35MWe
to 40MWe solar thermal plant; and (ii) a power block based on
mature fossil fuel technology. The proposed project will be sited
at Mathania, near Jodhpur, Rajasthan in an arid region. In addition
to high solar insolation levels (5.8 kWh/m2 daily average), the
proposed site involves approximately 800,000 m2 of relatively
level land with access to water resources and electric transmission
facilities. The solar thermal/hybrid station will operate as
a base load plant with an expected plant load factor of 80%.
The final choice of the fossil-fired power block would be left
to the bidders, subject to performance parameters set out in the
tender specifications.
- A likely design choice is an Integrated Solar Combined
Cycle (ISCC) involving the integrated operation of the parabolic
trough solar plant with a combined cycle gas turbine using fossil
fuels such as fuel oil, low sulfur heavy stock (LSHS) or naphtha.
Such a plant would consist of (i) the solar field; (ii) a combined
cycle power block involving two gas turbines each connected to
a heat recovery steam generator (HRSG) and a steam turbine connected
to both HRSG; and (iii) ancillary facilities and plant services
such as fire protection, fuel oil/LSHS/naphtha supply and storage
system, grid interconnection system, water supply and treatment
systems, etc. A control building will house a central microprocessor
control system that monitors and controls plant operations
- Technical assistance: The project will provide
technical assistance to ensure that adequate institutional and
logistical support for the technology is available for future
expansion of solar thermal power. Specifically, funds will be
made available for: i) the promotion of solar thermal technologies
among potential investors; ii) operation and maintenance efficiency
improvement program; (iii) monitoring and evaluation of the project
and of overall solar thermal program in India; (iv) staff training
and development of a local consultancy base; v) upgrading of
test facilities; and vi) improved collection and measurement of
solar insolation data and other solar resource mapping activities.
Annex 3 presents a summary of the proposed technical assistance
package.
- Status of Preparation. Several studies were
prepared since the eighties which dealt with the development of
the first parabolic trough solar thermal station in the country.
In 1994, MNES commissioned a feasibility study for such a scheme,
with a capacity of 35MWe to be situated in Mathania. The study
was prepared by a local engineering firm with technical support
from international solar experts regarding the solar field.
This study became the subject of further review by an engineering
consultancy firm engaged by the State Government of Rajasthan
(GOR) in April 1995 and supplemented by an options study conducted
in October 1995 with the assistance of German consultants funded
by KfW. An environmental assessment of the proposed project is
underway, solar field performance requirements are to be further
reviewed by an international expert, and tender specifications
and evaluation criteria finalized. A GEF preparation grant of
$750,000 is being applied for to cover the incremental costs of
project preparation.
RATIONALE FOR GEF FINANCING
- The project is consistent with GEF's operational strategy
on climate change in support of long-term mitigation measures.
In particular, the project will help reduce the costs of proven
parabolic trough solar technology so as to enhance its commercial
viability. The proposed project is expected to be the first
in a multi-country series of investments which together would
re-commercialize the technology. Similar projects in Mexico,
Morocco, and the United States are in advanced stages of preparation.
Additional solar thermal projects are under consideration in
Egypt, Tunisia, Israel, Jordan, Spain, Italy and Greece (Crete).
Other countries in the high insolation regions of Africa have
also shown interest. While not all of these projects are expected
to materialize in the near term, up to four projects including
the initiative in India, are anticipated to be developed within
the next five years. The combined effects of these projects will
be to accelerate the process of cost reduction, demonstrate the
technical performance of the technology in a wider range of climate
and market conditions, and create a sustainable market for parabolic
trough solar thermal technology.
- The capital cost of solar thermal power generation technologies
is significantly higher than fossil-based conventional power.
Nevertheless, costs have been falling sharply from $5,000 per
kW for the first solar thermal Luz plant, to $2,900 for the latest
Luz plant in California. Recent estimates for proposed integrated
solar combined cycle plants are estimated to be in the region
of $2,000 per kW. The proposed GEF support which will be supplemented
by a financial contribution of $20 million from the Government
will directly help buy-down the installation and associated technology
development cost of the solar power plant to render it competitive
with other sources of power in Rajasthan.
- Demonstrating the solar plant's operational viability under
Indian conditions is expected to result in follow-up investments
by the private sector both in the manufacture of the solar field
components and in larger solar stations within India. Insights
into local design and operating factors such as meteorological
and grid conditions, and use of available back-up fuels, are expected
to lead to its replicability under Indian conditions, opening
up avenues for larger deployment of solar power plants in India
and other countries with limited access to cheap competing fuels.
Creation of demand for large scale production of solar facilities
will in turn lead to reductions in costs of equipment supply and
operation. It is also expected to revive and sustain the interest
of the international business and scientific community in improving
systems designs and operations of solar thermal plants.
- The Project is expected to result in avoided emissions of
3.1 million tonnes of carbon over the operating life of the solar
thermal plant relative to generation from a similar-sized coal-fired
power station. The cost of carbon avoidance is estimated at
$27 per tonne based on the avoided cost of $83 million and $15.80
per tonne based on a $49 million GEF grant.
SUSTAINABILITY AND PARTICIPATION
- Government commitment to the project is evidenced by the
various studies commissioned by MNES over the past years and the
agreement by the Government of Rajasthan (GOR) to host this entry
project and to provide the land. Support from the Government
is further confirmed by the fact that grant and equity funding
from MNES and GOR, respectively, are being provided to assist
in making the project more attractive to the private sector and
permitting the power output to be sold at a reasonable price to
the state utility.
- One of the prime objectives of the demonstration project
is to ensure capacity build-up through 'hands on' experience
in the design, operation and management of such projects under
actual field conditions. Involvement in the project of various
players in the energy sector, such as local industries, the private
independent power producer (IPP), Rajasthan State Electricity
Board (RSEB), Rajasthan Energy Development Agency (REDA), MNES
and others, will help to increase the capacity and capability
of local technical expertise and further sustain the development
of solar power in India in the longer term.
- Linkage to Power Sector Reforms. The project will
be implemented in the context of on-going reforms in Rajasthan's
power sector which calls for commercializing the sector and attracting
private sector investments and management skills into all new
generation facilities. Project sustainability will depend on
to what extent the impact of the initial investment cost is mitigated,
operating costs fully recovered, professional management introduced,
and infrastructure and equipment support for operation and maintenance
made accessible. Accordingly, (a) the solar thermal station
will be operated as an IPP to be managed and jointly owned by
the private sector; (b) subsidy support will be limited to capital
costs; (c) fuel input, power supply and other transactions would
be on a commercial basis and backed up by acceptable marketable
contracts; and (d) staff selection and management would be based
on business practices; (e) project site would be situated where
basic infrastructure is well developed and engineering industries
established. However, technology development costs associated
with project operations would be clearly identified and be covered
under the technical assistance program.
- To ensure project sustainability, as a condition to appraisal,
tariff adjustments would have to be effected by the Rajasthan
State Electricity Board that would enable the utility to fully
meet its cash operating expenses . Although RSEB raised its
tariff by 8% in September 1995, another 10 per cent increase
in average tariff is required to achieve cash break-even. In
addition, agreement will be sought for GOR to implement the set
of tariff reforms along the lines and timetable set forth in
the proposed India: Rajasthan State Power Sector Restructuring
Project.
LESSONS LEARNED AND TECHNICAL REVIEW
- GEF and IDA are actively supporting MNES's revised Plan on
promoting wind, solar PV and small hydro technologies through
the India: Alternate Energy Project (GET28633-IN) and associated
India: Renewable Resources Development Project (Cr2449-IN) .
The projects were approved by the Board in December 1992 and
became effective in April 1993 and involve a line of credit to
IREDA to promote and finance private sector investments in these
three sub-sectors. Favorable prospects for commercialization
of an emerging technology in India is best reflected in the wind
sector which saw a rapid growth in installed capacity in the last
three years largely through private sector initiatives. An industrial
base for wind equipment supply and engineering has emerged in
the country with as many as 26 joint venture companies some of
which are now poised to enter the export markets. Moving both
the wind and solar PV program towards the commercial mainstream
has involved concerted efforts on the part of the government
and the private sector in removing barriers to marketing, delivery
and operation of these alternate energy systems. These resulted
in establishment of acceptable pricing mechanisms, contractual
arrangements, performance specifications involving agreement among
policymakers, power utilities, manufacturers, financial entities,
investors, contractors and consultants.
- On solar thermal development, key lessons learned from the
California experience are the need for (a) financially credible
project developers who can adequately bear the construction risks;
and (b) an incentive structure that would enable prospective investors
to view the operation of the solar thermal facility as an integral
part of their corporate business rather than as a mere tax shield
or marginal investment.
- Technical Review. There are varying claims to superiority
in efficiency of other active solar thermal technologies particularly
those that involve direct steam generation. However, a review
of the latest developments in the solar sector worldwide indicates
that the solar parabolic trough LS-3 technology is the most commercially
mature among solar thermal power applications. Similar plants
with an aggregate capacity of 354MWe are in operation in California,
USA with plant sizes ranging from 13.8MWe to 80.0MWe. Moreover,
the technology lends itself to hybridization with conventional
fossil-based technologies. A number of options were considered
in determining the location, sizing and hybridization of the project.
In addition to considering an oil-fired rankine cycle engine,
consultants reviewed up to 14 ISCC variants, with the 140MW ISCC
option yielding the lowest estimated levelized economic generation
cost of Rs2.05 per kWh. The project proposal incorporates results
of the STAP technical review.
PROJECT FINANCING AND BUDGET
- Project Cost: The total investment cost of
the project based on an ISSC facility is estimated at US$240 million
excluding interest during construction (IDC) and taxes. The technical
assistance package will involve an estimated budget of $4.5 million.
Of the total plant investment, $66 million is attributable
to development of the solar field, $121 million for fossil fuel-based
power block, and about $52 million for engineering, site development,
and initial working capital requirements. The local cost component
is estimated to account for over 60 per cent of plant investments.
Taxes and duties would involve an additional 10% of project costs
and IDC as much as 14% of investment cost.
- Project Financing. The project is proposed
to be financed as follows: (a) $10 million grant from GOI (Ministry
of Non-Conventional Energy Sources); (b) $10 million equity contribution
from the State Government of Rajasthan (GOR); (c) GEF grant of
$49 million to finance the cost of developing a 35MWe to 40MWe
solar plant component and finance the TA package; (d) equity from
the private sector IPP developer; and (e) the balance from Kreditanstalt
fur Wiederaufbau (KfW) in the form of a mixed credit.
INCREMENTAL COSTS
- The solar thermal/fossil-fired hybrid station would be operated
on a base-load mode, with an 80% plant factor. In the absence
of the solar thermal project, the RSEB would continue with its
generation expansion plan which relies heavily on lignite and
coal for base-load generation capacity. A coal-fired plant is
therefore taken as the baseline case. The lifecycle cost
of 140MW coal power generating station is estimated at $243 million
as shown in Annex 2, Table 2-1. The estimated costs for the GEF
alternative such as a 140MW ISSC is $326 million as given in Table
A-2. This results in an incremental cost of $83 million.
- The GOI and GOR have pledged grants of approximately $10
million each towards the Project. Co-financing requested of
GEF is $45 million. While the combined grant contributions do
not fully cover the full avoided cost, this is deemed sufficient
given that the Project developer will also be benefiting from
the co-financing terms from KfW.
- The Project would provide a technical assistance
package
for promotion of solar technology and lay the groundwork for replication
of the project in other parts of India. In the absence of the
proposed Project, the scale of these activities would have been
very modest, at an estimated baseline level of $500,000 over the
Project period. The TA package is estimated to cost $4.5 million,
with the incremental cost of $4 million proposed for GEF funding.
SOCIAL AND ENVIRONMENTAL ASPECTS
- The project will have positive environmental effects: based
on an ISCC configuration, it will displace 692 thousand tonnes
of coal per year, and consume 181 thousand tonnes of LSHS fuel,
resulting in avoided carbon emissions of 3.1 millions over the
operating life of the project. The potential negative impacts
of the project would have to be addressed through a comprehensive
environmental assessment study and recommended mitigation plan
which would have to be completed before appraisal. Particular
attention would have to be given on the fuel handling and storage
arrangements for the conventional power block. While displacement
of population is not expected to arise, land aquisition process
would be reviewed to ensure compliance with legal requirements.
ISSUES, ACTIONS AND RISKS
- There are at least four areas of project risks. First, there
is the financial and operational risk that the project fails to
attract IPP developers who are financially and technically capable
to complete the project and to manage the plant efficiently so
as maintain sound financial operations. Second, there is a technical
risk that the technology may not work properly in the Indian context.
For instance, climatological conditions such as haze and sand
storms may affect the performance of critical components of the
power plant. Also, the maintenance and operation of critical
solar equipment and controls may prove to be too complex. Third,
there is the economic risk that the application of the technology
in India may be more costly than anticipated, making it completely
unaffordable. Fourth, there is the replicability risk that, even
if the demonstration project works as planned, the project may
not lead to its replication in India. This may be due to lack
of proper policy instruments or economic resources, or simply
because the conditions do not bring about a sufficiently large
decrease in the production costs.
- The financial and operational risk will be addressed by
carefully structuring the IPP solicitation process to ensure that
only financially sound and technically qualified developers are
included. Requirements for risk capital contribution, performance
guarantees and plant management arrangements would be established
in the tenders. Other risks are being minimized through comprehensive
feasibility studies of the project to assess project cost and
performance under different operating scenarios. In addition,
close monitoring of project implementation and operation will
be undertaken in order to introduce early corrective actions which
can lead to reduction in costs and improvements in plant performance.
Finally, rigorous evaluation of project performance will be
undertaken and feedback provided to policy planners, utilities,
manufacturers, and research community. The information will also
be made available to other countries in the region to help create
favorable conditions for investments in solar thermal power in
other developing countries and thus help bring down cost of equipment
supply.
INSTITUTIONAL FRAMEWORK AND PROJECT IMPLEMENTATION
- This will be the first time that a parabolic trough solar
thermal plant would be pursued through competitive bidding. The
IPP process will consist of having the State Government of Rajasthan
issue a Request for Proposal (RFP) for a power plant to be located
at Mathania with an aggregate capacity of about 140MW having a
35 to 40MWe solar plant component. Choice of secondary fuel for
the power block will be left to the bidder. The amount and terms
of financing available from GEF, the Central and State Government
and KfW will be stated in the RFP. In order to firm up the project
cost and secure the most appropriate blend of financing, it is
recommended that early procurement action be taken. Sufficient
lead time will need to be given to the bidders to prepare their
technical proposals and a well defined draft power purchase agreement
(PPA) issued at time of tender to enable the participants to bid
aggressively. Appraisal would take place only after the
price bids are opened and project costs firmed up. Negotiations
will commence when the winning bidder is known to allow finalization
of financing package. The GEF and government grant components
would however remain as announced at time of tender.
- The project is to operate autonomously as an IPP and would
sell power to the grid based on a commercial power purchase agreement
(PPA) with RSEB. Ideally, the purchase price will be fixed in
a manner to enable the IPP to repay its loan obligations as well
as meet all its operating expenses. A suitable escalation provision
in the sale price will also be needed to ensure that the revenue
stream of the IPP does not suffer because of inflation. Competitive
bids for fuel oil/naphtha-based IPP plants for various load centers
of Rajasthan including the Jodhpur area have been evaluated yielding
prices ranging from Rs2.10 to Rs2.40 per kWh. This will serve
as initial benchmark for the short-term avoided cost currently
faced by the grid. While fiscal incentives during project start-up
would be beneficial to the IPP, operating subsidy support would
be avoided. At the minimum, project revenues should be sufficient
to meet cash operating expenses even if full recovery of capital
costs is not achieved.
- Operation and Maintenance . The O&M
arrangement would need to be clearly spelt out in the bid offer.
Maintenance needs of the conventional (power block) part of the
project, including turbines, heat exchangers, electrical equipment,
etc., can readily be met within India. For the solar field operation
and maintenance, staff exposure and intensive training at the
solar thermal power plants in Kramer Junction, USA may be necessary.
- Monitoring and Evaluation. It is proposed
that the Government of Rajasthan would engage the services of
local and international consultants to monitor and evaluate the
progress of project implementation and performance from start
of plant construction through the initial plant operating period.
In addition, progress of technical assistance activities would
also be monitored and reviewed. Regular progress reports on all
components of the project would be prepared and submitted to GEF
and KfW including to the scientific community and members of
the Indian and international solar energy industry. A formal
mid-term project review would be conducted jointly by the Bank
and KfW midway through the project implementation period.
- Training. Due to the demonstration nature
of the project, continuous involvement of technical institutions
such as MNES's Solar Energy Center, Indian Institutes of Technologies,
consultancy firms and other related institutions is also expected.
The project will also benefit from the expertise available at
other organizations, e.g., SANDIA National Laboratories and NREL
in USA, and other research and training institutions in Israel
and Spain.
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